We have refunded a overpayment to a customer and paypal is temporarily with holding it on the customer's end. Has this happened to anyone before?

Yep, We refunded a payment. Got held for a week.

Nothing more... hmm.

they must earn alot for the interest holding the money.

That has happened to me everytime that I have tried to refund someones money or had money refunded to me. It is usually only held for about one or two weeks.